YUM! BRANDS

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COMPANY OVERVIEW (2017 10-K):

As of December 31, 2017, YUM consists of three operating segments:

  • The KFC Division which includes the worldwide operations of the KFC concept.
  • The Pizza Hut Division which includes the worldwide operations of the Pizza Hut concept.
  • The Taco Bell Division which includes the worldwide operations of the Taco Bell concept.

YUM has over 45,000 restaurants in more than 135 countries and territories. The Company’s three concepts: KFC, Pizza Hut, Taco Bell develop, operate and franchise a worldwide system of restaurants. Units are operated by the concept or, by independent franchisees or licenses under the terms of a franchise or license agreement.

Each concept has proprietary menu items and emphasizes the preparation of food with high quality ingredients, as well as unique recipes and special seasonings to provide appealing, tasty and convenient food at competitive prices.

A brief description of each concept:

KFC:

KFC restaurants across the world offer fried and non-fried chicken products such as sandwiches, chicken strips, bone-in chicken and other chicken products marketed under a variety of names. KFC also offers a wide variety of entrees and side items suited to local preferences and tastes. Restaurant décor throughout the world is characterized by the image of the Colonel. KFC operates in 131 countries and territories throughout the world. As of year-end December 31, 2017, KFC had 21,487 units; 97% of which are franchised.

PIZZA HUT:

Pizza Hut features a variety of pizzas which are marketed under various names. Each of these pizzas is offered with a variety of different toppings suited to local tastes. Many Pizza Huts also offer pasta and chicken wings; including approximately 5,900 stores offering wings under the Wing Street brand.

Pizza Hut operates in 106 countries and territories throughout the world. As of year-end 2017, Pizza Hut had 16,748 units; 99% of which are franchised.

TACO BELL:

Taco Bell specializes in Mexican-style food products including various types of tacos, burritos, quesadillas, salads, nachos and other related items. Taco Bell offers breakfast in its US stores.

Taco Bell operates in 27 countries and territories throughout the world. As of year-end 2017, there were 6,849 Taco Bell units primarily in the US; 90% of which are franchised.

GRUBHUB, INC.:

In February 2018, YUM entered into an agreement with GrubHub, Inc., the leading online and mobile take-out food ordering company in the US. Under this agreement YUM has acquired $200M of GRUB equity. GrubHub will provide support in the US for the KFC and Taco Bell branded online delivery channels along with access to GrubHub’s online order platform, logistics and last mile support for delivery orders and point of sale integration to streamline operations.

SOURCES OF REVENUE (2017 10-K):

 As of December 31, 2017 (10-K 2017), YUM’s global revenues were $5.9 Billion, consolidated systemwide sales were $11.6 Billion and margins on Company operated restaurants averaged 16.0%.

The following table breaks down systemwide revenues, systemwide sales and operating profits by divisions.


Operating Profit:

KFC Division – The increase in operating profit was driven by same store sales growth, international net new unit growth, lower G&A and higher renewal and transfer fees.

Pizza Hut Division – The decrease in operating profit was driven by increases in advertising costs associated with TV Pizza Hut US Transformation Agreement.

Taco Bell Division – The increase in operating profit was driven by same store sales growth, lower G&A and net new unit growth.

STRATEGIC LONG-TERM PLANS (2017 10-K):

On October 11, 2016, YUM announced their Strategic Transformation Plans to drive global expansion of their Brands: KFC, Taco Bell, and Pizza Hut following the YUM China separation.

Major features of the Transformation and growth strategy involved being more focused, even more highly franchised and increasingly efficient.

Key Features:

  • More Focused. Four growth drivers form the basis of YUM’s strategic plans and repeatable business model to accelerate same-store sales growth and net-new restaurant development at KFC, Pizza Hut and Taco Bell around the world over the long term. The Company is focused on becoming best-in-class in:
    • Building distinctive, relevant and easy Brands.
    • Developing unmatched franchise operating capability.
    • Driving bold restaurant development.
    • Growing unrivaled culture and talent.

 

  • More Franchised. YUM intends franchise restaurant ownership to be at least 98% by the end of 2018.

 

  • More Efficient. The Company is revamping its financial profile, improving the efficiency of its organization and cost structure globally, by:
    • Reducing annual capital expenditures to approximately $100 million in 2019;
    • Lowering general and administrative expenses (G&A) to 1.7% of system sales in 2019; and
    • Maintaining an optimized capital structure of ~0x Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) leverage.

 

From 2017 through 2019, YUM planned to return an additional $6.5-$7.0 billion to shareholders through share repurchases and cash dividends. They intend to fund these shareholder returns through a combination of refranchising proceeds, free cash flow generation and maintenance of their five times EBITDA leverage. YUM anticipates generating proceeds in excess of $2 billion, net of tax, through their refranchising initiatives.

YUM – CHINA BUSINESS SPIN OFF:

On October 31, 2016 (the distribution date) YUM completed the spinoff of their China business (the separation) into an independent publicly traded company under the name YUM China Holdings, Inc. (YUM China). On the distribution date, YUM distributed to each of its shareholders one share of YUM China common stock for each share of common stock held as of the record date. The distribution was structured to be a tax-free distribution to US shareholders for federal income tax purposes in the United States. YUM China’s common stock trades on the New York Stock Exchange under the symbol YUMC. After the distribution, YUM does not beneficially own any shares of YUM China common stock.

Concurrently, with the separation, a subsidiary of the Company entered into a master license agreement with a subsidiary of YUM China for the exclusive right to use and sub-license the use of intellectual property owned by YUM and its affiliates for the development and operation of KFC, Pizza Hut, and Taco Bell restaurants in China. Prior to the separation, YUM operations in mainland China were reported in their former China Division segment results. As a result of the separation, the results of operations and cash flows of the separated business are presented as discontinued operations in YUM’s Consolidated Statement of Income and Consolidated Statement of Cash Flows for periods presented prior to the separation.

YUM  CHINA (Investment Day Presentation October 29, 2017) – Highlights

As of the Investor Day Presentation, it had been one year since the YUM China spinoff from YUM. Joey Wat, the new CEO of YUMC, outlined the path forward for China’s largest restaurant chain in the years ahead.

  1. Growth Potential

YUM China has over 7,700 KFC and Pizza Hut restaurants in China; thus, being the largest chain in China. Management thinks there is no reason for there to be fewer of its restaurants in China than in the U.S.

  1. It’s Hard to Build in China

Business isn’t easy in the world’s most populous country. Building restaurants is challenging as real estate isn’t readily available. YUM has built a dining empire in spite of this headwind and is well entrenched in Chinese culture management beliefs. This gives YUM China an advantage over its competitors.

  1. Focus on the Core Portfolio

KFC and Pizza Hut have been in China over 30 years. By focusing on these core Brands rather than bringing in Taco Bell, they can better meet the changing Chinese consumer which has created the need to update the existing chains.

  1. Digital and Delivery Innovation

Another area surrounding the revamping of KFC and Pizza Hut is Digital and Delivery. YUM China has launched a new “Super App” and membership program keeps diners engaged with the respective Brands, alerting them to deals, and day part promotions and the option of ordering and digital payments.

Catering and Delivery are also a growing part of business in China. This area has grown in recent years due to the growth of dual income households.

In late 2017, over 5,100 of the 7,700 plus locations offered delivery. Delivery sales were running 14% of sales, up from 9% in 2016.

  1. A Restaurant Chain Built for the Future

YUM China planned to drive world leading  food and restaurant technology innovation, a trend that is just beginning in the U.S.

YUM China – Full-Year Highlights (2017 10-K)

  • Same store sales grew 4% with an increase of 5% at KFC and 1% at Pizza Hut.
  • Total system sales grew 8%, including growth of 9% at KFC and 7% at Pizza Hut, excluding F/X.
  • Total revenues were $7.1 billion, an increase of 6% (8%, excluding F/X).
  • Opened 691 new restaurants during the full year, bringing total store count to 7,983 across more than 1,200 cities.
  • Restaurant margin improved 1.5 percentage points to 16.8%, primarily driven by same store sales leverage and aided by the impact of retail tax structure reform.
  • Operating Profit was $785 million, an increase of 23%. Excluding Special Items, Adjusted Operating Profit was $782 million; an increase of 20% (23%, excluding F/X) driven by strong sales and margin expansion.
  • Net Income was $403 million, a decrease of 20%. Excluding Special Items, Adjusted Net Income was $564 million; an increase of 20% (24%, excluding F/X).
  • Effective tax rate was 47.0%, or 26.9% excluding Special Items.
  • Diluted EPS was $1.01, a decrease of 26%. Excluding Special Items, Adjusted Diluted EPS was $1.42, an increase of 11% (15%, excluding F/X).

YUM SHAREHOLDER’S EQUITY (2017 10-K):

Under the authority of YUM’s Board of Directors, they repurchased shares of YUM’s Common Stock from 2014 through 2017. All amounts shown below exclude applicable transaction fees.

  • Includes the effect of $45 million in share repurchases (0.7 million shares) with trade dates prior to December 31, 2016 but settlement dates subsequent to December 31, 2016.

On November 17, 2016, YUM’s Board of Directors authorized share repurchases through December 2017 of up to $2.0 billion, of which $1.9 billion was executed, an average price of $72/share. In Q1’18, $528 million was purchased, an average price of $81/share, leaving $972 million on the current authorization.

Recent Developments: Per Q1’18 Corporate Release and Q1 Conference Call

Core operating profit growth was flat, as expected. Profits from refranchising, appreciation of the GrubHub investment, a lower tax rate, and FX profits, accounted for the gain in reported earnings per share. There was also a revenue recognition change in GAAP treatment of payments to and from franchisees, including advertising fund treatment. Operating profit, ex F/X was even at KFC, up 2% at Pizza Hut, down 6% at Taco Bell. Same store sales were +2, +1, and +1, respectively. Net new units were +4, +2, and +4%, respectively.

Per the Conference Call:

Full year guidance of flat operating profit remains intact, including the headwind of 6-7 percentage points from refranchising and G&A savings, along with 2-3 points from the revenue recognition changes. At KFC: Turkey is doing especially well with SSS growth of 10%, 27% over two years, and 23 new units opened there in the last 12 months. India had Q1’18 SSS of 10%, the 8th qtr. In a row of gains, and 50 gross new units opened in the last 12 months. The US had flat SSS in Q1’18 and continues to innovate with new products. KFC in the UK changed distribution partners which disrupted sales patterns, yet to be fully corrected as of early May. At Pizza Hut: US SSS were up 4%, with net new units down 2%, though new unit development was flat sequentially which reversed a three year decline. Digital ordering, better advertising including the new NFL relationship, emphasis on delivery, are all helping. At Taco Bell: There was 4% net new unit growth, and the US successfully lapped 8% SSS last year with introduction of Nacho Fries. The GrubHub relationship has great potential, as all POS operations are being full integrated between KFC, Taco Bell & GrubHub.

In relation to the long term plan, 144 units were refranchised in Q1, 52 KFC, 43 Pizza Huts, and 49 Taco Bells, bringing the total franchise mix to 97%. All in, 500 gross new units were opened, 239 net new units, which is a sequential  acceleration. Long term debt was refinanced in April, reducing annual interest expense by about $5M and moving total debt closer to 5 times EBITDA. Overall, the long term objective is to get to 7% system sales growth, which will require both an uptick in net new units as well as same store sales.

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